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Yen firms, Australian dollar slips ahead of RBA

Tue, Jul 05, 2016 - 11:21 AM

The Australian dollar inched lower on Tuesday as investors braced for the central bank to potentially signal an imminent easing at its review later in the day, while the safe-haven yen got a lift from worrying signs in China's service sector.

PHOTO: REUTERS

[TOKYO] The Australian dollar inched lower on Tuesday as investors braced for the central bank to potentially signal an imminent easing at its review later in the day, while the safe-haven yen got a lift from worrying signs in China's service sector.

Trading was subdued with no directional clues from US markets, which were shut on Monday for the Independence Day holiday.

A private survey showed that activity in China's services sector rose to an 11-month high in June, but a composite measure of activity fell to a four- month low.

That raised fears the services sector may not be able to make up for a prolonged decline in the industrial economy that has pushed China's growth to 25-year lows.

Market voices on:

"There are no domestic factors that could explain the yen's strength, so it appears to be the 'risk-off' effect from China that's bringing the US dollar/yen to test the 102 level," said Ayako Sera, market economist at Sumitomo Mitsui Trust Bank in Tokyo.

The US dollar was down 0.4 per cent at 102.09 yen, while the euro fell 0.7 per cent to 113.63 yen.

The Aussie slipped 0.3 per cent to US$0.7511, though it remained within site of Monday's more than one-week high of US$0.7545.

The Reserve Bank of Australia is widely expected to skip a chance to ease again as it awaits second quarter consumer price data due on July 27, but markets are betting on a cut in August given low inflation and uncertainty following Britain's vote to leave the European Union.

All 37 economists polled by Reuters last week expected the RBA to keep the cash rate unchanged at a record low 1.75 per cent.

But possible policy paralysis after no clear winner emerged from a weekend election continued to threaten the Aussie's outlook, in addition to the potential Brexit fallout.

"Brexit is not a direct threat to Australia, but over time the hit to investment and risk-taking sentiment may weigh on commodity prices, adding to the pressure on the RBA," Marshall Gittler, head of investment research at FXPrimus, said in a note.

"At the June meeting, the RBA basically kept a neutral stance and made no comment about which way the next move might be. The market will be focused on whether the statement continues that neutral stance or moves to an outright easing bias," Mr Gittler said.

Brexit has ramped up the urgency for some Asian central banks to ease monetary policy, as a prolonged period of uncertainty threatens a wider downshift in trade and investment.

The timing of Britain's actual exit from the EU remains unclear, and against this backdrop, investors have begun to hope for additional stimulus and UK corporate tax cuts to blunt the impact of the move.

Sterling shed 0.3 per cent to US$1.3246, but remained above last week's 31-year trough of US$1.3122 plumbed in the wake of the Brexit vote.

The US dollar index, which tracks the greenback against a basket of six rival currencies, edged down slightly to 95.626 .